The credit policy identified monsoons, crude price volatility and demand-side pressures as reasons likely to affect inflationary expectations. We believe that, among these, manufacturing inflation is going to be the biggest problem.
While the markets might not be worried on that count right now, the rise in prices is likely to lead to a hardening of interest rates.
However, we feel the impact of an increase in prices might not be major. Rising affordability, job security and growth prospects will sustain demand.
If the demand is high, companies might have pricing power. Post the budget, companies increased prices and I don't think that move slowed demand at all.
Further, companies may not raise prices that much if they are able to increase their volumes and capacity utilisation, thus saving on costs and achieving scale. Even in 2008-09, when demand was not strong, rural India was buying and only urban pockets saw weak demand.
Given the rise in commodity prices, does it make sense to invest in commodity stocks? I have my doubts. I am not sure that a demand for underlying commodity, not just in India but globally, is there.
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Some of the liquidity sloshing around has found its way into the commodity sectors as well. Stock piles for some commodities are at multi-year highs. Investors have to be careful about their exposure to commodity stocks.
It is so unusual of a commodity cycle to be at the forefront of a move out of a recession. So, the commodities sector, both on counts of government intervention and the fact that we are price followers, keeps the sector out of my list.
With the market at 18 times one-year forward earnings, I would be a bit defensive in my portfolio. If I were to build one now, I would put money in domestic consumption stories that are defensive as well.
Say, something like the pharma sector, where there is growth. It is a defensive sector and you might see lot more M&A (merger and acquisition) action.
Since some scrips are at their peaks, I suggest an investment plan that can help you pick stocks at peaks as well as troughs.
Other interesting themes within consumption that interest me are retailing, education and healthcare, though there are few listed options.
However, expect the scenario to change as more companies get listed.
(The author is CEO of Equities at Ambit Capital — as told to Ram Prasad Sahu and Jitendra Kumar Gupta)